SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File Number: 0-2616
CONSUMERS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1666392
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1513 Cedar Cliff Drive, Camp Hill, PA 17011
(Address of principal executive offices) (Zip Code)
717-730-6306
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing such requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock April 30, 2002
------------------------ -------------------
$.01 Stated Value 2,576,810 shares
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements:
Consolidated Statements of Net Assets in Liquidation - 3
March 31, 2002 and December 31, 2001
Consolidated Statements of Changes in Net Assets in Liquidation -
For the Three Months Ended March 31, 2002 and 2001 4
Notes to Consolidated Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Consumers Financial Corporation Page 2
Form 10-Q March 31, 2002
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
MARCH 31, DECEMBER 31,
(IN THOUSANDS) 2002 2001
------------------------------------------------------------------------------------------------------
(UNAUDITED)
Assets
------
Investments:
Fixed maturities $ 915 $ 930
Mortgage loans on real estate 9 13
Short-term investments 1,657 1,795
------------ -------------
Total investments 2,581 2,738
Cash 31 7
Accrued investment income 19 9
Other receivables 14 14
Other assets 292 253
------------ -------------
Total assets 2,937 3,021
------------ -------------
Liabilities and Redeemable Preferred Stock
------------------------------------------
Liabilities:
Unclaimed property 155 159
Severance pay 178 178
Preferred dividends payable 96 96
Other liabilities 177 50
------------ -------------
606 483
Redeemable preferred stock:
Series A, 8 1/2% cumulative convertible, authorized 632,500
shares; issued and outstanding 452,614 shares; net of a
reduction to reflect estimated liquidation value (2002, $2,195;
2001, $1,989) 2,331 2,538
------------ -------------
Total liabilities and redeemable preferred stock 2,937 3,021
------------ -------------
Net assets in liquidation $ 0 $ 0
============ =============
See Notes to Consolidated Financial Statements
Consumers Financial Corporation Page 3
Form 10-Q March 31, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
IN THOUSANDS) 2002 2001
------------------------------------------------------------------------------
Revenues:
Net investment income $ 20 $ 47
Miscellaneous 15 39
------ ------
35 86
------ ------
Expenses:
Rent and related costs 6 6
Salaries and employee benefits 43 46
Professional fees 40 35
Taxes, licenses and fees 8 8
Miscellaneous 33 29
------ ------
130 124
------ ------
Excess of expenses over revenues (95) (38)
Decrease in unrealized appreciation of debt securities (15) (5)
Preferred stock dividends (96) (97)
Adjustment of preferred stock to estimated liquidation value 206 131
Retirement of treasury shares - preferred 9
------ ------
Decrease in net assets for the period 0 0
Net assets at beginning of period 0 0
------ ------
Net assets at end of period $ 0 $ 0
====== ======
See Notes to Consolidated Financial Statements
Consumers Financial Corporation Page 4
Form 10-Q March 31, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
1. OVERVIEW AND BASIS OF ACCOUNTING:
The operating losses incurred by the Company from 1993 to 1997
significantly reduced its net worth and liquidity position. As a result, in
1998, the Company sold its core credit insurance and related products
business, which had been its only remaining business operation, following
the sales in 1994 and 1997 of all of its universal life insurance business
and the 1996 sale of its auto auction business. The Company's revenues and
expenses now consist principally of investment income on remaining assets
and corporate expenses.
On March 24, 1998, the Company's shareholders approved a Plan of
Liquidation and Dissolution (the Plan of Liquidation) pursuant to which the
Company is liquidating its remaining assets and paying or providing for all
of its liabilities. If the Company proceeds with the Plan of Liquidation,
all of its remaining cash will eventually be distributed to the preferred
shareholders. The Company does not expect to be able to make any payment to
its common shareholders under the Plan of Liquidation. As discussed more
fully in Note 2, in February 2002, the Company entered into an option
agreement with an investor group pursuant to which the investor group may
obtain a controlling interest in the Company's common stock. If the option
is exercised, the liquidation of the Company would be discontinued. Since
there is no assurance at this time that the option will be exercised, the
Company continues to proceed with the Plan of Liquidation.
The consolidated financial statements include the accounts of Consumers
Financial Corporation and its wholly-owned subsidiary, Consumers Life
Insurance Company (Consumers Life).
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring items) necessary to present fairly the Company's consolidated net
assets in liquidation as of March 31, 2002 and the consolidated changes in
its net assets for the three months ended March 31, 2002 and 2001.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's 2001 Form 10-K.
The changes in net assets for the three months ended March 31, 2002 are not
necessarily indicative of the changes to be expected for the full year.
Consumers Financial Corporation Page 5
Form 10-Q March 31, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2. PLANNED SALE OF CONSUMERS LIFE AND PROPOSED ACQUISITION OF THE COMPANY:
AGREEMENT TO SELL CONSUMERS LIFE: On January 31, 2002, the Company entered
into a Stock Purchase Agreement to sell all of the stock of Consumers Life
to Black Diamond Insurance Group, Inc., a Delaware corporation. At the
closing of this transaction, the Company will receive cash equal to the
fair value of the net assets of Consumers Life plus $10,000 for each of the
subsidiary's 25 state insurance licenses. On February 21, 2002, the
purchasers filed a Form A with the Delaware Insurance Department seeking
approval of the change in control. Such approval is expected to be received
on or about May 31, 2002.
OPTION AGREEMENT: On February 13, 2002, the Company entered into an option
agreement (the Option Agreement) with CFC Partners, Ltd., an unrelated
investor group based in New York (CFC Partners). The execution of the
Option Agreement with CFC Partners followed a review by the Board of
Directors of various proposals to acquire a controlling interest in the
Company. The Option Agreement permits CFC Partners to acquire a 51%
interest in the Company's common stock through the issuance of 2,700,000
authorized but unissued shares. The option price of $108,000 was deposited
into an escrow account in March 2002. The option is exercisable within 15
business days following the completion by the Company of a tender offer to
the preferred shareholders, in which those shareholders will be given an
opportunity to receive a cash payment in exchange for their shares. The
tender offer, if accepted by all of the preferred shareholders, will result
in the payment to those shareholders of substantially all of the Company's
remaining net assets. Under Pennsylvania laws, the newly issued common
shares will have no voting rights until CFC Partners obtains the required
approval from the common shareholders.
The Board of Directors considered a transaction of this type in lieu of the
Plan of Liquidation because it has the potential to produce future value
for the common shareholders, who are not expected to receive any
distribution under the Plan of Liquidation, while protecting the rights of
the preferred shareholders by giving them the opportunity to exchange their
shares for cash.
If CFC Partners exercises its option to acquire control of the Company, it
has indicated that it intends to merge or otherwise combine certain
existing and start-up businesses into the Company. CFC Partners has further
indicated that these businesses initially will include (i) a company that
will provide long distance telephone services at discounted rates, (ii) a
company which provides services that enable its customers to deploy and
migrate to E-business portals and E-marketplaces and (iii) a company that
will offer business to business online financial services.
Consumers Financial Corporation Page 6
Form 10-Q March 31, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
2. PLANNED SALE OF CONSUMERS LIFE AND PROPOSED ACQUISITION OF THE COMPANY
(CONTINUED):
The sale of Consumers Life, as discussed above, is essential to completing
the Company's tender offer to the preferred shareholders because virtually
all of the Company's cash funds are held by Consumers Life and cannot be
withdrawn under Delaware insurance laws until the subsidiary is either sold
or liquidated.
3. INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. At March
31, 2002 and December 31, 2001, the Company had no material deferred tax
liabilities and only one material deferred tax asset relating to net
operating loss carry forwards. This deferred tax asset, which totaled
$2,010,000 and $2,013,000 at March 31, 2002 and December 31, 2001,
respectively, has been fully offset by a valuation allowance.
4. COMMITMENTS AND CONTINGENCIES:
In 1997, the Company and a third party reinsurer were sued by a former
general agency with whom the Company had a partnership agreement. The
claimant was seeking monetary damages to compensate it for the Company's
alleged failure to share profits pursuant to the partnership agreement and
for other alleged losses. The Company filed two counterclaims against this
agency seeking damages for losses the Company sustained as a result of the
agency's alleged breach of the partnership agreement and to recover an
unpaid loan made to the agency. In December 2000, the trial for the
Company's claim for recovery of the unpaid loan took place, and, in January
2001, the court awarded a $90,000 judgment in favor of the Company. In
August 2001, the parties settled this matter through mediation. As a result
of this settlement, the Company agreed to pay the agency $210,000 in cash
and to mark as satisfied the $90,000 judgment the Company had previously
been awarded. The $90,000 receivable had been fully reserved in the
Company's financial statements.
Certain claims have been filed or are pending against the Company and its
subsidiary. In the opinion of management, based on opinions of legal
counsel, adequate reserves, if deemed necessary, have been established for
these matters, and their outcome will not have a significant effect on the
net assets or changes in net assets of the Company and its subsidiary. The
Company has taken certain income tax positions in previous years that it
believes are
Consumers Financial Corporation Page 7
Form 10-Q March 31, 2002
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARY
(IN PROCESS OF LIQUIDATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED):
appropriate. If such positions were to be successfully challenged by the
Internal Revenue Service, the Company could incur additional income taxes
as well as interest and penalties. Management believes that the ultimate
outcome of any such challenges will not have a material effect on the
Company's financial statements.
5. REDEEMABLE PREFERRED STOCK:
The terms of the Company's 8.5% redeemable preferred stock require the
Company to make annual payments to a sinking fund. The first such payment
was due in July 1998. The preferred stock terms also provide that any
purchase of preferred shares by the Company will reduce the sinking fund
requirements by the redemption value of the shares acquired. As a result of
the Company's purchases of preferred stock prior to 1998, no sinking fund
payment was due in 1998, and the required payment due for 1999 was reduced
from $550,000 to $414,610. The purchase of 18,000 preferred shares in 1999,
7,400 shares in 2000, and 3,447 shares in 2001 further reduced the 1999
sinking fund deficiency to $126,140. On July 1, 2000, an additional
$550,000 sinking fund payment became due but was not paid. On July 1, 2001,
another $550,000 sinking fund payment became due but was also not paid.
Consequently, at March 31, 2002, the total sinking fund deficiency was
$1,226,140. Because of the Company's inability to make the sinking fund
payments, it may not pay any dividends to common shareholders and may not
purchase, redeem or otherwise acquire any common shares.
As indicated in Note 2, the Company intends to make an offer to the
preferred shareholders to purchase, for cash, all outstanding shares of the
preferred stock. The Company expects to mail the necessary offering
documents to its preferred shareholders by mid-June 2002, following the
approval of such documents by the Securities and Exchange Commission.
Payments to those shareholders who elect to tender their shares are
expected to be made by mid-July 2002.
Consumers Financial Corporation Page 8
Form 10-Q March 31, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
A review of the significant factors which affected the Company's net assets
in liquidation at March 31, 2002 and the changes in its net assets in
liquidation for the three months then ended is presented below. Information
relating to 2001 is also presented for comparative purposes. This analysis
should be read in conjunction with the Consolidated Financial Statements and the
related Notes appearing elsewhere in this Form 10-Q and in the Company's 2001
Form 10-K.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-Q may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are identified by their use of such terms and phrases as "intends",
"intend", "intended", "goal", "estimate", "estimates", "expects", "expect",
"expected", "project", "projected", "projections", "plans", "anticipates",
"anticipated", "should", "designed to", "foreseeable future", "believe",
"believes" and "scheduled" and similar expressions. Readers are cautioned not
to place undue reliance on these forward-looking statements which speak only as
of the date the statement was made. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
OVERVIEW
At the Special Meeting of Shareholders held on March 24, 1998, the
Company's preferred and common shareholders approved the sale of the Company's
credit insurance and related products business, which was the Company's only
remaining business operation. In connection with the sale of its in force
credit insurance business, the Company also sold its credit insurance customer
accounts and one of its life insurance subsidiaries. At the Special Meeting,
the shareholders also approved a Plan of Liquidation and Dissolution (the Plan
of Liquidation), pursuant to which the Company has been liquidating its
remaining assets and paying or providing for all of its liabilities so that it
can distribute its remaining cash to its preferred shareholders. If the Company
proceeds with the Plan of Liquidation, it is unlikely that any cash will be
available for distribution to the common shareholders.
The Plan of Liquidation permits the Board of Directors to consider other
alternatives to liquidating the Company, if such alternatives are deemed by the
Board to be in the best interest of the Company and its shareholders. In that
regard, in August 2001, the Board solicited proposals to acquire control of the
Company and received proposals from several investor groups. Following a review
of the proposals which were received, in February 2002, the Company entered into
an option agreement (the Option Agreement) with CFC Partners, Ltd., an unrelated
New York-based investor group (CFC Partners). The Option Agreement permits CFC
Partners to acquire a 51% interest in the Company's common stock for $108,000.
The option is exercisable within 15 business days following the completion by
the Company of a tender offer to its preferred shareholders. The tender offer,
if accepted by all of the preferred shareholders, will result in the payment to
those shareholders of substantially all of the Company's remaining net assets.
If the option is exercised, CFC Partners intends to merge or otherwise combine
certain existing and start-up businesses into the Company.
Consumers Financial Corporation Page 9
Form 10-Q March 31, 2002
The Board of Directors considered this alternative to the Plan of
Liquidation because it has the potential to produce future value for the common
shareholders while protecting the rights of the preferred shareholders. As
indicated above, the common shareholders are not expected to receive any
distribution under the Plan of Liquidation. If the option is exercised, the
liquidation of the Company would be discontinued. However, since there is no
assurance at this time that the option will be exercised, the Company continues
to proceed with the Plan of Liquidation.
As a result of the approval of the Plan of Liquidation, the Company adopted
a liquidation basis of accounting in its financial statements for periods
subsequent to March 24, 1998. Under liquidation accounting rules, assets are
stated at their estimated net realizable values and liabilities are stated at
their anticipated settlement amounts. Prior to March 25, 1998, the Company
reported the results of its operations and its asset and liability amounts using
accounting principles applicable to going concern entities. If the option
discussed above is exercised, and the Company resumes business operations, it
would again adopt accounting principles applicable to going concern entities.
As discussed below, the Company's net assets in liquidation, which
represent the amount available for distribution to common shareholders, were
reduced to zero in 1999. All decreases in the Company's net assets since that
time have reduced the estimated liquidation value of the preferred stock.
Similarly, any future decreases during the remainder of the liquidation period
will continue to reduce the amount available for distribution to the preferred
shareholders. During the first three months of 2002, this reduction totaled
$206,000 compared to a reduction in the same period of 2001 of $131,000. The
decline in the current year was principally due to an excess of expenses over
revenues of $95,000 and preferred dividends of $96,000. For the three months
ended March 31, 2001, the excess of expenses over revenues was $38,000 and
preferred dividends totaled $97,000.
RESULTS OF OPERATIONS AND CHANGES IN NET ASSETS
A discussion of the material factors which affected the Company's changes
in net assets in liquidation for the three months ended March 31, 2002 and 2001
is presented below.
THREE MONTHS ENDED MARCH 31, 2002
As indicated above, since the Company has no net assets available for
common shareholders, all decreases in net assets must be deducted from the
estimated liquidation value of the Company's preferred stock. In the first
quarter of 2002, the estimated liquidation value of the preferred stock declined
by $206,000. As a result, at March 31, 2002, the 452,614 shares of preferred
stock outstanding had an estimated liquidation value of $2,331,000.
The decrease in the liquidation value of the preferred stock in the first
three months of 2002 was due to an excess of expenses over revenues of $95,000
and to preferred dividends of $96,000. The Company continues to incur
professional fees, primarily legal and accounting fees, in connection with the
liquidation process. During the first three months of the year, the Company
also incurred approximately $6,000 in legal fees relating to the option
agreement with CFC Partners. Accounting fees in connection with year-end 2001
financial reporting totaled $24,000. In addition, the Company's investment
income declined sharply (from $47,000 in the first quarter of 2001 to $20,000 in
Consumers Financial Corporation Page 10
Form 10-Q March 31, 2002
2002) because of a continuing decline in investable assets (due to negative cash
flows) and a drop in short-term interest rates.
THREE MONTHS ENDED MARCH 31, 2001
In the first quarter of 2001, the estimated liquidation value of the
preferred stock decreased by $131,000 to $3,147,000. This decrease in the
liquidation value was primarily due to $97,000 in dividends paid to the
preferred shareholders and an excess of expenses over revenues of $38,000. The
Company incurred $35,000 in audit, legal and actuarial fees during the period in
connection with year-end financial reporting matters and ongoing litigation.
The Company's investment income for the quarter was $47,000.
ESTIMATED NET EXPENSES AND OTHER CHANGES IN NET ASSETS DURING LIQUIDATION PERIOD
If the option discussed above is not exercised by CFC Partners, the Board
of Directors intends to continue with the liquidation of the Company. The
option to acquire control of the Company is not exercisable by CFC Partners
until after the Company completes a tender offer to its preferred shareholders.
The Company believes that most of the preferred shareholders will elect to
surrender their shares in the tender offer. Therefore, if the investor group
does not exercise its option, the Company would use the assets remaining in the
Company (comprised of cash which had been allocated to the preferred shares not
tendered plus a cash reserve) to cover its operating expenses during the
remainder of the liquidation period, to pay any remaining liabilities and to
make a final distribution to the preferred shareholders who did not previously
tender their shares.
If CFC Partners does not exercise its option, the time frame for completing
the liquidation is dependent upon a number of factors, the most significant of
which is the timing of the proposed sale of Consumers Life, since substantially
all of the Company's assets are held by this subsidiary and are restricted as to
their use by state insurance regulations. In January, the Company entered into
an agreement to sell the subsidiary and its 25 state insurance licenses. In
February 2002, the purchasers filed a Form A with the Delaware Insurance
Department seeking the Department's approval of the change in control. Such
approval is expected to be received by May 31, 2002.
The Company is also a defendant in several minor lawsuits which must be
settled or resolved in court. While management believes the plaintiffs' claims
in these cases are without merit, the ultimate outcome of these matters cannot
be determined at this time. Furthermore, the Company may be entitled to all or
a portion of the assets in a contingency fund established by the Company and the
purchaser of its credit insurance business based on the claims experience of the
in force credit insurance business from October 1, 1997 to September 30, 2002.
However, based on the claims experience to date, as provided by the purchaser,
it does not appear likely that the Company will receive any portion of the
contingency fund.
As a result of the foregoing, a final distribution under the Plan of
Liquidation cannot be made to the preferred shareholders until (i) Consumers
Life is sold, (ii) the Company has resolved its remaining litigation matters and
(iii) a determination is made regarding the amount of any contingency fund
distribution which might be payable to the Company.
If the Company proceeds with the Plan of Liquidation, management believes,
based on its current estimates, that the Company's future expenses and other
changes in net assets, including preferred shareholder dividends, will exceed
its revenues during the remainder of the liquidation
Consumers Financial Corporation Page 11
Form 10-Q March 31, 2002
period by approximately $325,000 to $375,000. Actual revenues and expenses and
other net asset changes could vary significantly from the present estimates
due to uncertainties regarding ( i) when the remaining non liquid assets,
particularly the stock of Consumers Life, will be liquidated, (ii) when the
tender offer to the preferred shareholders occurs, (iii) the level of actual
expenses which will be incurred and (iv) the ultimate resolution of all current
contingencies and any contingencies which may arise in the future.
FINANCIAL CONDITION
CAPITAL RESOURCES
Since adopting the Plan of Liquidation, the Company has made no commitments
for capital expenditures and, if the Company proceeds with the liquidation
process, it does not intend to make any such commitments in the future.
However, if the Company is sold pursuant to the Option Agreement discussed
above, the Company's plans regarding capital expenditures and related
commitments could change.
For the three months ended March 31, 2002, the Company's cash and invested
assets decreased by $133,000, from $2,745,000 at the beginning of the year to
$2,612,000 at March 31, 2002. As indicated above, the decrease is principally
the result of both an excess of expenses over revenues and preferred dividends
paid.
Invested assets at March 31, 2002 consisted principally of ( i) U.S.
Treasury Notes, owned by Consumers Life, which are on deposit with four state
insurance departments in connection with licensing requirements, (ii) one
mortgage loan, which is scheduled to be paid in full by June 2002 and (iii)
short-term investments, principally money market funds.
LIQUIDITY
Historically, the Company's subsidiaries met most of their cash
requirements from funds generated from operations, while the Company generally
relied on its principal operating subsidiaries to provide it with sufficient
cash funds to maintain an adequate liquidity position. As a result of the
Company's decision to sell its remaining operations, liquidate its non-liquid
assets and distribute cash to its shareholders, the Company's principal sources
of cash funds are investment income and proceeds from the sales of non liquid
assets. If the Company proceeds with the Plan of Liquidation, these funds must
be used to settle all remaining liabilities as they become due, to pay expenses
until the Company is dissolved and to pay dividends on the preferred stock until
a final distribution is made to the preferred shareholders. Alternatively, if
the Company is acquired in connection with the Option Agreement discussed above,
substantially all of the Company's remaining liquid assets will be available to
complete the tender offer to the preferred shareholders.
The adequacy of the Company's liquidity position under the Plan of
Liquidation will be principally dependent on its ability to sell its remaining
non-liquid assets and the timing of such sales, as well as on the level of
Consumers Financial Corporation Page 12
Form 10-Q March 31, 2002
expenses the Company must incur during the liquidation period. The Company's
liquidity has been particularly affected by the fact that virtually all of its
assets are held by Consumers Life and are not available for distribution to the
Company without the approval of the Delaware Insurance Department.
REDEEMABLE PREFERRED STOCK
The terms of the Company's 8.5% redeemable preferred stock require the
Company to make annual payments to a sinking fund. The first such payment was
due in July 1998. The preferred stock terms also provide that any purchase of
preferred shares by the Company will reduce the sinking fund requirements by the
redemption value of the shares acquired. As a result of the Company's purchases
of preferred stock prior to 1998, no sinking fund payment was due in 1998, and
the required payment due for 1999 was reduced from $550,000 to $414,610. The
purchase of 18,000 preferred shares in 1999, 7,400 shares in 2000, and 3,447
shares in 2001 further reduced the 1999 sinking fund deficiency to $126,140. On
July 1, 2000, an additional $550,000 sinking fund payment became due but was not
paid. On July 1, 2001, another $550,000 sinking fund payment became due but was
also not paid. Consequently, at March 31, 2002, the total sinking fund
deficiency was $1,226,140. Because of the Company's inability to make the
sinking fund payments, it may not pay any dividends to common shareholders and
may not purchase, redeem or otherwise acquire any common shares.
As indicated above, in connection with the proposed acquisition of the
Company by CFC Partners, the Company intends to make an offer to the preferred
shareholders to purchase, for cash, all outstanding shares of the preferred
stock. The Company expects to mail the necessary offering documents to its
preferred shareholders by mid-June 2002, following the approval of such
documents by the Securities and Exchange Commission. Payments to those
shareholders who elect to tender their shares are expected to be made by
mid-July 2002.
INFLATION
If the Company proceeds with the Plan of Liquidation, it intends to
liquidate its assets, pay all of its liabilities, distribute any remaining cash
to its preferred shareholders and ultimately dissolve within the next year.
Under those circumstances, the effects of inflation on the Company are not
material. If the Company is acquired pursuant to the Option Agreement, the
effects of inflation on the Company may change.
Consumers Financial Corporation Page 13
Form 10-Q March 31, 2002
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The requirements for certain market risk disclosures are not applicable to
the Company because, at March 31, 2002 and December 31, 2001, the Company
qualifies as a "small business issuer" under Regulation S-B of the Federal
Securities Laws. A small business issuer is defined as any United States or
Canadian issuer with revenues or public float of less than $25 million.
Consumers Financial Corporation Page 14
Form 10-Q March 31, 2002
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except for the matters discussed in Note 4 of the Notes to
Consolidated Financial Statements included elsewhere in this Form
10-Q, neither the registrant nor its subsidiary are involved in any
pending legal proceedings other than routine litigation incidental to
the normal conduct of its business nor have any such proceedings been
terminated during the three months ended March 31, 2002.
ITEM 2. CHANGES IN SECURITIES
During the three months ended March 31, 2002, there have been no
limitations or qualifications, through charter documents, loan
agreements or otherwise, placed upon the holders of the registrant's
common or preferred stock to receive dividends. As discussed in Note 5
of the Notes to Consolidated Financial Statements appearing elsewhere
in this Form 10-Q, the registrant is prohibited from paying dividends
on its common stock so long as the deficiency in the sinking fund for
the preferred stock exists.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of March 31, 2002, the registrant was not in default in the payment
of principal, interest or in any other manner on any indebtedness and
was current with all its accounts. In addition, there was no arrearage
in the payment of dividends on its preferred stock. However, see Note
5 of the Notes to Consolidated Financial Statements appearing
elsewhere in this Form 10-Q for information regarding the deficiency
in the sinking fund for the preferred stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the
registrant during the three months ended March 31, 2002.
ITEM 5. OTHER INFORMATION
None
Consumers Financial Corporation Page 15
Form 10-Q March 31, 2002
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Part I
-------
(11) Statement re computation of per share earnings (ii)
(15) Letter re unaudited interim financial information (ii)
(18) Letter re change in accounting principles (ii)
(19) Report furnished to security holders (ii)
(23) Consents of accountants (ii)
Part II
--------
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession (i) (iii)
(3) Articles of incorporation and by-laws (i)
(4) Instruments defining the rights of security holders,
including indentures (i)
(10) Material contracts (ii)
(22) Published report regarding matters submitted to a vote
of security holders (ii)
(23) Consents of experts and counsel (excluding accountants)
(ii)
(24) Power of attorney (ii)
(99) Additional exhibits (ii)
(i) Information or document provided in previous
filing with the Commission
(ii) Information or document not applicable to
registrant
(iii) Information or document included as exhibit to
this Form 10-Q. Any exhibits to such information
or document are not included herein.
(b) No reports on Form 8-K were filed by the Company during the
three months ended March 31, 2002.
Consumers Financial Corporation Page 16
Form 10-Q March 31, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSUMERS FINANCIAL CORPORATION
-------------------------------
Registrant
Date May 13, 2002 By /S/ James C. Robertson
------------ -------------------------------------
James C. Robertson
President and Chief Executive Officer
Date May 13, 2002 By /S/ R. Fredric Zullinger
------------ -------------------------------------
R. Fredric Zullinger
Senior Vice President and Chief
Financial Officer
Consumers Financial Corporation Page 17
Form 10-Q March 31, 2002